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Rating Action:

Moody's Assigns Ratings of Ba1 and Aa3.mx to the State of Guerrero's Upcoming MXN 500 million Municipal Lending Program

 The document has been translated in other languages

17 Dec 2010

Mexico, December 17, 2010 -- Moody's de Mexico has assigned a rating of Aa3.mx (Mexico National Scale Rating) to the State of Guerrero's upcoming MXN 500 million Municipal Lending Program. Moody's Investors Service has assigned a rating of Ba1 (Global Scale, Local Currency) to this program.

Within this program, Banorte, the lender, will grant individual loans to municipalities, which will be paid by a trust (Invex as trustee) that will receive Participation General Fund and Municipal Promotion Fund federal transfers from the Federal Treasury (TESOFE). The State of Guerrero is the originator of the municipal trust.

Municipalities that access the lending program will sign individual loan agreements with Banorte and adhere to the trust agreement. The loans will pay an interest rate composed of the 28-day Mexican Interbank Interest Rate (TIIE in Spanish) plus a spread according to the rating of the program and the maximum maturity will coincide with the end of the municipal administrations.

The assigned ratings are based on documentation received by Moody's as of the rating assignment date. While individual loan contracts within the program will be signed during the life of the program by the municipalities, Moody's does not expect changes to the program structure over this period. In the event that the program structure changes from the documentation submitted to us, Moody's will assess the impact that these differences may have on the ratings and act accordingly.

RATINGS RATIONALE

The Ba1/Aa3.mx ratings assigned to the lending program reflect the underlying creditworthiness of the State of Guerrero (Ba2/A2.mx, positive outlook) supported by the following legal and credit enhancements:

1.- Trust structure and the irrevocable instruction to TESOFE reduce the probability of a municipality or the State successfully interfering with the flow of funds.

2.- Estimated cash flows generate moderate debt service coverage ratios. Under a Moody's base case scenario, cash flows for the loan are projected to provide 1.6x debt service coverage at the lowest point over the life of the loan. Under a stress case scenario, estimated cash flows for the loan are projected to provide 1.4x debt service coverage, at the lowest point over the life of the loan.

3.- Solid level of reserve funds that represent 2x coverage of debt service that provides a cushion against payment delays.

4.- Political risks at the level of individual municipalities are reduced by short maturities of loans, with repayments scheduled before the end of current municipal administrations.

5.- Through an Irrevocable Instruction from the State of Guerrero to its Master Trust, after paying the state's debt service obligations it must transfer up to 20% of the total outstanding municipal loans if an event of early amortization on one or more loans is triggered.

The rating rationale also recognizes the following credit negatives:

1.- If the State's debt service payable through the Master Trust increases, remaining cash flows will be reduced. These cash flows may potentially be less than the 20% of the total outstanding municipal loans that should be transferred to the Municipal Trust in an event of early amortization, limiting the structure's enhancement provided by this mechanism.

2.- The complex structure of program, under which the Municipal Trustee handles a potentially large number of accounts, poses operational risks. These risks are offset by a positive historic track record of the trustee in operating complex structures (same trustee as the original program).

3.- Under the terms of the municipal loan contracts, the non-respect of certain contractual obligations, including the provision of timely financial information, grants the lender the right to call an early amortization of individual loans. While this consideration provides a mechanism by which the credit culture of individual municipalities may influence the performance of the program, related risks are offset, partially, by a state credit committee that screens and monitors the finances of participants in the program.

The principal methodologies used in this rating were Regional and Local Governments Outside the US published in May 2008, and The Application of Joint Default Analysis to Regional and Local Governments published in December 2008.

Moody's National Scale Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".mx" for Mexico. For further information on Moody's approach to national scale ratings, please refer to Moody's Rating Implementation Guidance published in August 2010 entitled "Mapping Moody's National Scale Ratings to Global Scale Ratings."

The last rating action with respect to the State of Guerrero was taken on September 14 2010, when Moody's changed the outlook on the State of Guerrero's Ba2/A2.mx issuer ratings outlook to positive from stable.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of assigning a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Mexico
Adrian Javie Garza
Asst Vice President - Analyst
Sub-Sovereign Group
Moody's de Mexico S.A. de C.V
JOURNALISTS: 001-888-779-5833
SUBSCRIBERS:52-55-1253-5700

London
David Rubinoff
MD - Sub-Sovereigns
Sub-Sovereign Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's de Mexico S.A. de C.V
Ave. Paseo de las Palmas
No. 405 - 502
Col. Lomas de Chapultepec
Mexico, DF 11000
Mexico
JOURNALISTS: 001-888-779-5833
SUBSCRIBERS:52-55-1253-5700

Moody's Assigns Ratings of Ba1 and Aa3.mx to the State of Guerrero's Upcoming MXN 500 million Municipal Lending Program
No Related Data.
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